Though Democrats denied it during the 2012 campaign, Obamacare cut Medicare by $716 billion in order to partially fund $1.9 trillion in new entitlement spending over the next ten years. A big chunk of those Medicare cuts came from the market-oriented Medicare Advantage program. Cleverly, the Obama administration postponed the Medicare Advantage cuts until after the election, so as to persuade seniors that everything would be just fine. But the election is over. On Friday, the administration announced that it would be significantly reducing funding for the popular program. Its proposal, according to one analyst, “would turn almost every plan in the industry unprofitable.”

Democrats have long been hostile to the Medicare Advantage program, which allows seniors to get their Medicare coverage through plans administered by private insurers. Today, more than a quarter of retirees get their coverage through Medicare Advantage, and the program has experienced rapid growth over the past decade. Richard Foster, the recently-retired chief actuary of the Medicare program, has projected that Obamacare’s cuts to Medicare Advantage would force half of its current enrollees to switch back to the old, 1965-vintage Medicare program, and costing enrollees an average of $3,714 in 2017 alone.

New rates to be ‘enormously disruptive’

The new rates proposed by the Centers for Medicare and Medicaid Services, a.k.a. CMS, will have the net effect of reducing payments to Medicare Advantage plans by 7 to 8 percent in 2014, according to Citi managed care analyst Carl McDonald. “This includes the 2.3% reduction in per capita growth rate announced by CMS on Friday, and estimated 2-3% drop as rates move to parity with fee for service…a 1.5% reduction associated with the change in coding intensity adjustment” and the 2% health insurance premium tax. “These negatives are partially offset by an estimated 1% benefit from improved Star quality ratings, re-basing, better risk scores, and fee for service normalization, resulting in an overall decline of 7-8%,” wrote McDonald yesterday in a note to clients.

Because the typical for-profit managed care plan targets profit margins of only 5 percent, and non-profits even less, the net consequence would “turn almost every plan in the industry unprofitable,” according to McDonald, unless CMS changes its proposal. “If implemented, these rates and the program changes CMS is suggesting would be enormously disruptive to Medicare Advantage, likely forcing a number of smaller plans out of the business and creating disarray for many seniors.”

Could CMS bend the rules again?

CMS didn’t issue these rates because they’re mean. Obamacare requires these rate cuts; indeed, as I noted above, they were supposed to have been implemented before the election. “We appreciate that plans are facing several legislatively mandated changes affecting payment for 2014,” CMS’ Jonathan Blum and Paul Spitalnic write in their 199-page report. “We solicit comment on suggestions to address these challenges within the parameters of current law.” The final rates are to be issued on April 1.

CMS is likely to come under pressure to once again postpone the cuts, by engaging in rule-bending or accounting gimmicks. If CMS assumes that Congress passes a “doc fix” by the end of the year, in order to avoid a 25 percent reduction in physician reimbursement rates, plans could benefit from a 4 percent increase in government reimbursements. Understandably, CMS normally doesn’t incorporate the “doc fix” into its calculations unless one has been actually passed by Congress. CMS could also decline to implement a recalibration of its risk adjustment formula, something that would ease the pressure on insurers.

2014 will be the year when reality hits

It’s important to reduce the amount that the government spends on Medicare, and to do so in a way that minimally affects the care that seniors receive. The simplest way to do this is to gradually raise Medicare’s eligibility age by three months each year. Now that we have Obamacare’s insurance exchanges to support lower- to middle-income seniors, it’s not necessary to force Americans to pay taxes in order to subsidize health insurance for wealthy seniors like Warren Buffett and Mitt Romney.

But Obamacare chose a different path, one that will force more Americans into creaky, out-of-date programs like Medicaid and 1965-vintage fee-for-service Medicare. The law will dramatically increase the cost of privately-purchased health insurance, something that Obamacare supporters are only now starting to admit.

There will be much more to talk about as the Obama administration issues the rates, regulations, and mandates that the “Affordable Care Act” requires. Stay tuned.